Iwry at the Eye of the Coming IRA Storm
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Monday, June 21, 2010

Iwry at the Eye of the Coming IRA Storm

Insiders to the 401(k) industry are familiar with Mark Iwry, but his name remains a cypher to most others, including those in the mutual fund industry. At the very least, fundsters should learn to pronounce his name as they are about see and hear it (usually mispronounced) more often. Helpfully, the Wall Street Journal's Ellen Schultz sets aside space in Monday's paper to introduce him to Wall Street.

Schultz calls Iwry "a uniquely powerful Washington wonk, quietly guiding the nation's approach to retirement accounts and policy." He may or may not be beautiful, but he is influential. (He was No. 57 on the 2009 401kWire's 100 Most Influential People in 401(k) list after first appearing at No. 98 in 2008).

But first things first, his name is pronounced "Eev-Ree". He is also the son of a Dead Sea scrolls scholar, a graduate of Harvard Law School, a former associate at Covington & Burling and partner at Sullivan & Cromwell. A Brookings Institute fellow, the husband of a solo-practioner lawyer and a two-time member of the Treasury Department. In short, central casting's idea of a policy wonk. And that is a role he is now playing as senior adviser to the Treasury secretary and deputy assistant secretary (tax policy) for retirement and health policy at the Treasury. That makes Iwry the driver of the nation's retirement policy and puts his pet project -- the auto-IRA -- high on the list of policy changes that may be adopted as soon as next year. Indeed, the auto-IRA is already a part of the budget and is on path for a very quiet roll out.

Iwry's "big idea" borrows from the "nudge" concept of auto-401(k)'s that was most-fully developed by two University of Chicago professors -- Richard Thaler and Cass Sunstein -- to solve the problem of the lack of retirement plans offered by smaller employers.

The auto-IRA would require all employers with more than 10 workers to automatically enroll those workers in an IRA unless the worker opts out. Essentially, the worker would have some choice on whether to save, but the employer would have no choice at all on whether to participate other than by not adding an extra worker or two or by letting someone go.

On the surface, such an arrangement would be a boon to mutual fund firms. However, the law would likely create unintended consequences and practical challenges that would mean only a relatively few, if any, mutual fund industry players would benefit.

Industry research shows that the overwhelming majority of employers with more than 50 workers already offer a retirement plan and there is at least some evidence that plan saturation now reaches down to employers with as few as 25 workers; perhaps even fewer.

Yet, retirement plan providers' widely roaming sales forces have already uncovered most smaller employers with profitable demographics for asset managers. Those employers include law firms, architectural firms and others with a relatively few highly-compensated workers.

That would leave a relatively small window of employers -- mostly those from 10 to 25 workers -- effected by the rules.

In a world in which most plan fees are based on assets, these plans hold little value to plan administrators or asset managers.

In most cases those economically unattractive employers could only offer startup plans with no current assets and slow growth prospects, or they have worker demographics that would suggest a slow buildup of assets once a plan is in place. Imagine, for example, a restaurant, car wash, or other small business in which there is a proprietor and more than a handful of hourly, part-time or high turnover positions. In many cases those employers do not have ties to a payroll firm that would ease compliance with an auto-IRA mandate.

Simply put, Iwry's auto-IRA attempts to solve the issue of lack of retirement savings plans sponsored by small employers by attacking the cost side of the equation. It is not designed to make these smaller, low-balance plans more attractive to serve.

To remove costs, the auto-IRA removes administration hassles such as discrimination tests. It also exempts the employer from potential fiduciary liabilities that are a part of an ERISA qualified plan (again, addressing the cost issue).

However, the primary cost driver in the small plan market is the cost of acquisition of new clients, both at the employer level and at the worker level once a plan is in place; an issue the auto-IRA only addresses indirectly and to the extent that employers are forced to find a solution rather than have one brought to them.

In practice, most small employers who comply with the auto-IRA demand would be pulled into the program through their banking or payroll-vendor relationships. Those vendors, and not asset managers, would likely be best situated to win these employers business.

A second issue -- and a potential unintended consequence -- would be the unattractiveness of the accounts themselves. If the typical worker earns $40,000 per year and is required to defer five percent of her pay, the annual contribution is a mere $2,000. Even if repeated for a decade, that deferral does not add up to an account size that most mutual fund firms would be wishing to deal with.

Moreover, increasing the deferral over the default amount would require ongoing education that in the real world is most effectively provided face-to-face. With no realistic potential for these accounts to become attractive, and no scale provided for the effort as happens at larger employers, these meetings would likely not be something that happens.

It is likely, then, that most workers enrolled automatically in auto-IRA accounts see their savings end up in a bank savings account with little return (and little risk) and not in an investment account.

Over the longer term, auto-IRAs could also crowd out more full-service 401(k) plans that offer matches and more partioipant support than IRAs. As companies "grow up" they could discover that the auto-IRA fills their needs and they have no compelling reason to upgrade.

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